What's your burn rate?: A Retroactive Approach to Budgeting

Apr 9, 2007 by

When people are running start-ups, they often calculate their “burn-rate,” the rate at which they expend their financial “fuel.” If a company has $10,000 in the bank and a burn rate of $2,000 per month, it can exist for five months before it requires additional funding or revenue. People have burn rates as well. When we burn less than our monthly income, we accumulate savings, and when we burn more than our monthly income, our savings declines or debt accumulates.

When people change jobs or move cities, they often change their consumption patterns in response to the change in prices or their change in income. Until one settles into stable behavior, it may not be clear how much one is spending each month in the new setting. I typically allow myself three months for my budget to stabilize after a major transition. (There are often many one-time expenditures in the first few weeks after a move that should not be considered when determining revolving consumption.)

How to Determine Your Expenditures Retroactively

Step 1: Determine all means of consumption. I personally have one credit card and one ATM card. If you have all of your money directly deposited by your employer into your bank account, all of your expenditures will be traceable.

Step 2: Get your past six months of statements, preferably in a digital format.

Step 3: Open Excel and create two columns for each of the past six months. In each pair of columns, list the category of each expenditure and its quantity. Common categories to consider are restaurant food, groceries, rent, utilities (including telecom), gas, clothing, gifts, hobby-related, durable goods, and miscellaneous. (People may also consider child care, pet care, and health care as categories if they account for a substantial portion of expenditures.)

Credit card statements are nice, in that they record the precise nature of your expenditures. While cash expenditures from an ATM are harder to categorize, you can determine the dates in which you made withdrawals in order to place them into months. Also, you might wish to form a rule for ATM expenditures, like, “I spend 80% of my cash on food and 20% on parking.”

Step 4: Determine average monthly expenditures.

In Excel, to get the sum of the items in cells B2 to B30, simply time in cell B31: =sum(B2:B30)

If cells B31 through F31 contain each month’s total expenditures, you can get the average in cell G31 by typing: =average(B31:F31)

This number is your “burn rate.”

Step 5: Subtract your average expenditures from your monthly after-tax income (net income). That amount is the amount of money you have left over at the end of the month. If it is a positive number, you are building your savings. If it is a negative number, you are increasing your debt. Remember that even though you may have a positive amount left over, you might not have much free money at the end of each month if you have already allocated a large portion of that amount for your retirement.

Actions to Consider

If you have some savings, but are spending more than you are making each month, you will eventually burn through your savings. The amount of months this will take to completely occur can be determined by dividing your savings by your monthly overspending. So, if you have $10,000 in the bank, and are earning $1,500 a month, but spending $2,000 per month, you are reducing your savings by $500 per month. At this rate, you will have no savings and begin accumulating debt in 20 months.

Categorizing one’s savings is helpful, as it can be useful in determining where your expenditures are the greatest, and if some of your expenditures are avoidable. If your largest expense is groceries and you are overspending each month, there may be little that you can do. However, if you are overspending but are able to shift your consumption to cheaper substitutes (buying more groceries, instead of restaurant meals), you may be able to eliminate the deficit.

Budgeting retroactively is useful, as it can help you better understand how your typical behavior influences your financial situation. It is far easier to look back at your past actions than to commit to a specific course of actions (a budget) each day. Also, some people cause themselves great anguish by trying to make many small attempts at reducing their expenditures rather than by making a few large attempts at doing so. Retroactive budgeting can help you identify the low-hanging fruit in your budget. Housing and transportation expenditures are likely to be among the largest, and among the most changable with a single decision. It may be far harder to commit oneself to reducing miscellaneous expenditures.


  1. I think that this is an excellent way to look at your spending and you have given a great resource to reduce spending, i’ll definitely try creating a workbook to monitor my spending and try to determine my burn rate if I have one! thank you for the advice. Stan

  2. Kyle

    Excellent advice. Thats how I budget currently as I am a graduate student in college. When I calculate my ‘burn rate’ I sometimes must use estimates. I usually make my estimates of expenses higher than they may be and my income lower. This way I always have a ‘worst case’ scenario to monitor my budget. Its always a pleasure to update my budget and find that I have more money than I thought due to these skewed estimations.

  3. Heather

    I have tried calculating my family’s burn rate in other ways before, and it didn’t end up working out! This way does sound better. I guess my main problem is that when looking at, for instance, my bank statement, there may be an entry to Wal-Mart for $50.00. Is this food, diapers, prescriptions, clothing, or all of the above? It’s hard for me to categorize exactly where money goes, which is important when you’re on a tight budget.

  4. marco dellanna

    I find your article useful foe people who spend lot of money without noticing it, and in our society, they are a lot.
    I spend money only when I can’t do otherwise, and my money stack can go only up. Think to the future, and save every penny you can.

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